The 1% May Be Richer Than You Think, Research Shows

Carl Robits, 34, sleeps on London Wall, one of the main streets through the City, London’s financial district. He’s been homeless for about 18 months after a medical discharge from the Royal Anglian Regiment Second Battalion. Photographer: Jennifer Ryan/Bloomberg

Research conducted separately by European Central Bank
economist Philip Vermeulen and London School of Economics’
Gabriel Zucman show the wealth of the super-affluent -- hidden
by tax shelters and nonresponse to questionnaires -- is
undercounted. Correcting for similar lapses in income data
almost erases progress made from 1988 to 2008 in narrowing the
gap between the world’s rich and poor, World Bank research
found.

“We always suspected there was some low-balling of the top
1 percent,” said Joseph Stiglitz, a Nobel-prize winning
economist and author of “The Price of Inequality. “There’s a
growing sense that our system is rigged and unfair.”

Failure to get a better handle on the actual amount of
wealth and income means economists and policy makers don’t have
a proper understanding of the degree of disparity, which
represents a hurdle in addressing it. For instance, knowing that
earnings and assets are more concentrated could spur support for
changing the tax structure, Zucman said.

“If you don’t have a good idea of what the world looks
like, it’s hard to determine what the effects of policies will
be,” said Carter Price, senior mathematician at the Center for
Equitable Growth in Washington, which focuses on issues of
economic inequality. “Looking retrospectively, it’s hard to
assess what the effects of a policy were.”

Richest Rich

The richest of America’s rich -- the top 0.1 percent with
at least $20 million in net wealth -- held 23.5 percent of all
U.S. wealth in 2012 after adding in estimates of how much was
hidden in offshore tax havens, said Zucman, a visiting scholar
at the University of California at Berkeley. That compares with
his previous estimate of 21.5 percent.

He collaborates with Thomas Piketty, author of the
bestseller “Capital in the Twenty-First Century,” and
University of California at Berkeley professor Emmanuel Saez in
trying to come up with more accurate tax-record figures.

Survey data on all the ultra-rich also undershoot, foiled
in part by small sample sizes, ECB researcher Vermeulen writes
in a July paper. The 1 percent held 35 percent to 37 percent of
wealth in 2010, exceeding the 34 percent indicated in the
Federal Reserve’s Survey of Consumer Finances, Vermeulen found
in his paper.

While the Fed already oversamples the rich to try to make
its numbers more accurate, Vermeulen readjusted the data and
supplemented it with Forbes World’s Billionaires lists.

Greater Concentration

A greater concentration of income and wealth at the top
could help explain why consumer spending has been slow to
rebound from the recession that ended in June 2009, according to
Stiglitz.

“Some of the problems in the performance of the economic
system are related to the true degree of inequality, not the
measured degree of inequality,” he said.

Since the 18-month slump ended, the Bloomberg Industries
Mass Merchant Index, which includes Wal-Mart Stores Inc. and
Dollar General, is up 80 percent, less than the 109 percent gain
in the Standard & Poor’s 500 Index. Luxury retailers have
flourished, as evidenced by the 254 percent surge in the
Bloomberg Industries Global Luxury Goods Index, which includes
companies such as Coach Inc., Hermes International and Prada
Spa.

Not Surprised

Jeffrey Hollender, who is among the wealthiest 1 percent in
the U.S., isn’t surprised the world’s richest have even more
than currently estimated.

“The more money that you have, the easier it becomes to
hide that and avoid taxes,” said Hollender, 59, co-founder of
cleaning and personal-care products company Seventh Generation
Inc. He is a member of Responsible Wealth, a Boston-based
network that advocates for economic fairness.

The measurement of assets for Europe’s super rich could be
even faultier, according to Zucman. About 10 percent of their
wealth is in offshore accounts compared with 4 percent in the
U.S., he estimates in a May paper. Very rich people also have
wealth in foundations and holding companies that make
calculations difficult, he said.

It is possible that some European countries, “like the
U.K. in particular,” are “almost -- or even more -- unequal
than the U.S.,” Zucman said, a contrast with current data that
show they are more wealth-equal.

Sampling Bias

European surveys do less than U.S. surveys to counter
sampling bias and many miss the mark more, Vermeulen found. For
example, Austria’s top 1 percent held as much as 36 percent of
that country’s wealth in 2013, if adjusted with Forbes’ data.
That’s 13 percentage points more than one survey estimate
suggests, which would make Austria almost as unequal as the U.S.

Not understanding how much income and wealth the world’s
richest hold means they’re paying less in taxes. Financial
wealth held offshore costs the U.S. government $36 billion in
annual revenue from nonpayment of income, investment,
inheritance and estate taxes, according to Zucman’s paper.
That’s enough to buy lunch for every student in New York City
public schools for more than a century. Europe is losing about
$75 billion.

“There are potential implications for tax policy,” Zucman
said. “If inequalities are higher than we thought, then maybe
it can change views on the extent to which marginal tax rates
should be increased on top incomes or the extent to which we
should use other tools, like a wealth tax.”

Homeless Veteran

Governments could use the additional revenue to help
address imbalances. Carl Robits, 34, sleeps on London Wall, one
of the main streets through the City, London’s financial
district. He’s been homeless for about 18 months after a medical
discharge from the Royal Anglian Regiment Second Battalion.

He was part of the Occupy London movement when it took over
Finsbury Square in 2011-2012. Since then, “the system’s not any
better,” said Robits, who was back at Finsbury Square last
week. “There’s too much bureaucracy. Unless you have a drug or
alcohol problem, you’re not a high priority. I’m not being
helped. I’m not getting any form of advice or direction.”

The worldwide economy made some of the biggest strides in
globalization between the fall of the Berlin Wall and the start
of the past recession, causing living standards to improve for
millions of poor people, including in China and India. The World
Bank took a look at this period and found there actually was
very little progress in reducing global inequality once
adjustments were made for possibly undercounting the wealthy.

Gini Coefficient

In contrast with unadjusted figures that show a drop in
disparity, the World Bank’s Gini coefficient measuring the
extent of income inequality barely budged during those decades,
according to preliminary adjustments by economists Christoph
Lakner and Branko Milanovic.

“With a ‘top heavy’ adjustment, the decrease in inequality
-- present when we use all other adjustments -- almost entirely
dissipates,” they wrote in a December paper.

That’s surprising for a period when poverty was falling
sharply: The number of people living on less than $1.25 a day
dropped to 1.22 billion in 2010 from 1.91 billion in 1990 after
adjusting for inflation, World Bank data show.

If earning gaps haven’t narrowed around the world even as
the impoverished population declined, that could “really change
the way economists think about the last 30 years,” said
Lawrence Mishel, president of the Economic Policy Institute in
Washington, which advocates for workers’ rights.

Economic Policies

“We really need to have a good sense on who is holding
income and wealth, and how that’s changed over time, to get a
better sense of how economic policies are playing out,” said
Heidi Shierholz, an economist at the institute.

Tyler Cowen, an economics professor at George Mason
University in Fairfax, Virginia, and co-author of the economics
blog Marginal Revolution, thinks focusing on the top 1 percent
when looking at income distribution is misguided. It may matter
little if people such as Microsoft co-founder Bill Gates are
taking home a greater share of income, as long as the poor are
becoming better off in the process, he said.

“People worry about the top 1 percent too much; the real
question is whether there is opportunity for everyone else,”
Cowen said. “Inequality in a meaningful sense has gone down.”

Plus, the way income is measured skews perceptions of
inequality. Tax data on earnings don’t count transfer payments
made by the federal government through programs such as Social
Security. Those even out the distribution by shifting funds
toward poorer people, said Richard Burkhauser, a Cornell
University economist whose research focuses on how public
policies affect the economic behavior of vulnerable populations.

Concentration at the top and a poor grasp on inequality’s
scope do worry Dal LaMagna, chief executive officer at Brooklyn,
New-York-based manufacturer IceStone LLC and a member of
Responsible Wealth.

“It’s not good for the wealthy people sitting on Central
Park West or 5th Avenue to have so much money that everyone else
is hating them,” said LaMagna, 68, citing preferred addresses
of New York City’s rich. “Ignorance allows it to persist.”